Thursday, February 26, 2015

Hume & Kapp, et al.

Over at MaxSpeak, Sandwichman didn't get any response to his provocation that "human capital" was cooked up by the Chicago boys as a way of side-stepping the fundamental methodological critique posed by the institutional analysis in the tradition of John R. Commons and J. M. Clark, which dominated American labor economics -- and presumably labor economics journals -- in the 1940s and 50s. I particularly wanted to mention cost-shifting as an issue that "human capital" evades. This passage from The Foundations of Institutional Economics by K. William Kapp highlights some of the central motifs of institutionalism's critique of conventional theory. It also has the merit of mentioning the contribution of David Hume, among others and thus enabling the pun in the title.

Institutional economists have raised some very specific objections to the dominant conventional theory; and while it is not necessary to analyze in minute detail all the well-known aspects of this critique, it will be useful to review some of the exceptions taken by representative institutionalists to certain methodological procedures of conventional economics, if for no other reason than to make clear the distinct perspective and mode of thought which have guided them from the beginning. These exceptions will illustrate clearly and fundamentally how institutionalism conceives the task of economic analysis in a radically different manner than the traditional, pure theory of valuation, value, and price.

Starting with a brief outline of the evolution of the theory of value from its classical origins, we shall illustrate our thesis by brief references to the institutional critique, with particular emphasis on those elements of the critique that demonstrate the alternative perspective of the institutional approach. Both Adam Smith and David Hume made deliberate use of inherited concepts of natural order and natural law to show that the system of private enterprise, or "natural liberty," was not only theoretically conceivable and practically workable, but at the same time morally superior and more efficient in the use of given resources to the preceding mercantile system. Not only did this system tend to regulate itself, it also produced terms of exchange that possessed many, if not all, of the characteristics of a "just price," as the term was conceived and propagated by medieval thinkers; it guided labor, resources, and capital into the occupations and lines of production which corresponded to the wishes and preferences of the consumer. The labor theory of value, together with the hypothesis of maximizing behavior -- both major and central hypotheses of classical political economy -- asserted that market prices would gravitate around natural prices of goods and services at their normal level, or the level at which they covered their costs of production. Prices and wages could thus be considered just and equitable, and as such did not need to be controlled. If the labor theory of value, understood as an equilibrium, seemed to guarantee the theory of distribution, the maintenance of some form of macroeconomic balance or equilibrium was shown to be guaranteed by the principle of the conservation of purchasing power, which both Adam Smith and Jean-Baptiste Say considered self-evident.

The classical theory of Smith and his successors borrowed the equilibrium concept from mechanics and supplemented its notion of natural order, natural liberty, and natural law with an increasing dependence on the quantitative, utilitarian psychology of Jeremy Bentham as a basis for its explanation of human behavior, and particularly of economic behavior. By measuring and aggregating all input and output magnitudes in terms of prices (at equilibrium levels), and by identifying the social output as the sum total of these values at market prices, the theory and system supposedly provided their own quantitative yardsticks for measuring the performance and growth of the economy over time. The economy was also said to produce the greatest sum of pleasure possible to the greatest number of people, by allowing every individual economic unit to choose goods, occupations, and investment outlets according to its own preferences. Thus, what began as an exercise in objective analysis ended in a system of normative and political conclusions, formulated without apparent or explicit value premises. This unprecedented achievement, unparalleled in any other discipline, is the outcome of a specific procedure. By first defining the scope of the analysis and postulating specific behavior patterns, the position of equilibrium is endowed with characteristics that give it the appearance of an objective optimum. Used in this fashion, the concept of equilibrium lends itself to a superficially convincing defense of the laissez-faire system of natural liberty. Philosophers, aware of the presupposition of classical and neoclassical analysis, have shown the logical limitations and weaknesses of the concept of natural order and natural law; they have demonstrated that such doctrines have been used repeatedly to support open and hidden valuations of the greatest variety and mutual incompatibility and shown that the ideology does not exist that cannot be defended by an appeal to the laws of nature.

Institutional economists have developed their own analysis of the philosophical premises of classical and neoclassical economic theory into a thorough critique of their preconceptions. Veblen criticized the non-causal teleological character of the analysis in contrast to the viewpoint of modem science, and Gunnar Myrdal showed that conventional equilibrium analysis has continued a long tradition of normative (political) thinking while professing a commitment to a positive (value-free) and objective account of the natural world. In fact, both radical and conservative economists have been inclined to shape and use their economic analysis to support their political objectives and perform the logically untenable feat of arriving at normative political conclusions without explicit political premises. The political objectives of classical and neoclassical economists were those of anti-mercantilism, anti-regulation, and non-intervention. Theoretical economists appealed to natural order and natural law, based on a theory of man later reinforced by the utilitarian calculus. Aided also by the analogy to mechanics and stable equilibrium (i.e., under static conditions where no new “forces" produced changes in motion), they have developed a system of conclusions that make economic and political processes appear to work towards common goals and a maximization of "social welfare." Levels of equilibrium are so defined that processes of production and distribution, under the impulse of the forces of self-interest, tend automatically and in a self-correcting manner towards a socially desirable and optimal outcome. What was initially introduced as a simplifying assumption for the abstract representation of reality for purely analytical purposes is thus subtly converted into the idealized norm of a perfectly competitive market, providing direct criteria for economic policies without further diagnosis of the specific situation, and without explicit normative or moral value premises. This logically untenable feat of arriving at political conclusions without political premises is, however, achieved with the aid of logical fallacies, the norms and teleology derived from pre-analytical visions and ideologies have forced upon economics specious concepts, definitions, and assumptions. Thus, normative and ideological elements have shaped the concepts, language, distinctions, and modes of thinking of conventional economics. Institutional economics has made major contributions to identifying these fallacies, and in doing so has produced both a critique of conventional economic theory and a clear picture of the modern character of institutionalism itself, as a distinct approach to economic analysis. The most notable points of the institutional critique are the fallacies of the utilitarian foundations of economic theory, the fallacy of the doctrine of the sovereignty of the consumer, and the fallacy of the means-ends dichotomy.

12 comments:

Getting an economist to discuss the normative assumptions behind their supposedly positivist study is very difficult. I really enjoy reading your contributions because they help to show the layers upon layers of assumptions and political preferences underlying economists' supposedly objective, scholarly advice.

Based on a passing familiarity with Smith's "Theory of Moral Sentiments" and Hume's Treatise, I strongly suspect that this quotation is libelous with regard to both philosophers. Equating "classical economics" with "the economics of Smith and Hume" is a great way to sound more erudite than one really is and also a great way to be wrong.

Look, S-Man, you're great and all that, and I"m sure institutionalism is where it's at, but look at what you quoted. Adam Smith and David Hume's contribution to economics is read through the lens of utilitarianism. But...

David Hume died in 1776. Bentham published his book in 1789 and JSMill wasn't even born until 1806. Getting the timeline backwards... where have I heard that before?

This is from the Stanford Encyclopedia of Philosophy:

"Bentham also benefited from Hume's work, though in many ways their approaches to moral philosophy were completely different. Hume rejected the egoistic view of human nature. Hume also focused on character evaluation in his system. Actions are significant as evidence of character, but only have this derivative significance. In moral evaluation the main concern is that of character. Yet Bentham focused on act-evaluation."http://plato.stanford.edu/entries/utilitarianism-history/#JohStuMil

This is actually a very important point that could solve about half of economics current problems:

There are many kinds of moral philosophy with utilitarianism just being one example. Like all systems of moral philosophy, it doesn't hold up to rigorous examination. BUT not because of interpersonal comparisons of utility!!! Utilitarianism, among many other problems, obviously justifies torture in any number of circumstances.

When John Quiggin in a blog post explained that he had always read John Rawls as a way to do your utilitarianism analysis he unwittingly revealed a crucial source of economic confusion. It's not just psychology, sociology and biology that could inform econ if it weren't so insular, it's also the case that academic economists are utter morons in the area of philosophy.

You are reading a lot into an ambiguous conjunction. "The classical theory of Smith and his successors..." Given that it would have been clearer and better had Kapp written, "The classical theory, as developed by Smith's successors," that still doesn't mean that Kapp's sentence must be interpreted in the most unflattering and anachronistic sense.

Smith did indeed present the case for "the system of natural liberty." Does that make him a libertarian apologist for 21st century predatory corporate capitalism? No. Did Marx engender Stalinism and "the killing fields" of Cambodia? No. But it is futile to try to decipher the sense of crackpot superstitions without reference to the kernel-of-truth insights from which they have deviated.

My critique is not meant to cast aspersions on the substantive case made by Kapp and others against the labor theory of value. Quite the opposite.

Mankiw is wrong. The 1% don't get paid what they earn. OK. Right. But this error has been going on for a long time. And Mankiw seems to believe that he is a good person, trying to raise everyone's standard of living.

So the interesting question isn't: "Is the labor theory of value wrong?" The interesting question is: "How do smart men (and they are all men) of good faith come to believe in the labor theory of value?"

Part of the answer to that question is: economists don't understand moral philosophy. Specifically, they read Adam Smith as having a moral philosophy of "utilitarian capitalism", two words not coined when the WON was written.

In fact, the wider victory of Reagan/Thatcherism would have been impossible if the entire field of economics did not believe something like "Morality is complicated but utilitarianism is basically right."

Maybe I have the wrong impression, but I think that is a fair judgement of the moral philosophy understanding of academic economists.

What follows from this? There is nothing a Wall Street trader can do that is malum per se. And their is no amount of inequality that is unjust on it's face. Adam Smith and David Hume would have thought utilitarian libertarian capitalists were both immoral, but more importantly, soft brained morons.

"But my point still stands: why hasn't the institutional view succeeded in overturning these 'fallacies'?"

While we're at it, why didn't the left Hegelians succeed in overturning religion? The Whig history you get these days doesn't amount to more than a clumsy comb-over.

I quoted a few passages from the introduction to Kapp's book. In addition to the rest of Kapp's book, there is the rest of his work plus the corpus of other "institutionalists" such as Veblen, Commons, John Maurice Clark and others, not to mention the (quasi?) institutionalism of Keynes, other students of Marshall, Georgescu-Roegen ecological economists, etc.

It is difficult to overturn a fallacy when the economists' salaries depend on not admitting the fallacy has been overturned.

No doubt about it: I took a couple of paragraphs from an institutionalist who conflates Hume and Bentham as a chance to jump on my hobbyhorse. Was that the appropriate or moral thing to do?

The Reformation happened despite a bunch of very well paid cardinals. Why? Part of the reason is that one could go back to the founding text and say: "Let's remember the sermon on the mount."

So how do we get an economics reformation? One way might be to look at the founding text and notice that Adam Smith (Jesus, if you will) made it abundantly clear that economic judgments are a subset of normative judgments. It's right there in the Bible. Someone who claims to do non-normative economics should be burned at the stake. It's also quite clear that the Invisible Hand is not a model, it's a metaphor. Jesus uses that very word. So someone who draws a picture of that hand in action, a drawing of a sacred cross framed by an x axis and a y axis, has drawn a picture of a metaphor. Calling it a "model" is just saying you didn't study your Latin.

So then a would be Martin Luther like Deirdre McCloskey comes around, but right there in her 97 Theses (Two Secrets of Economics) she praises Jesus (Smith) for his libertarianism.

Adam Smith is a libertarian? It's very hard to have a reformation when Martin Luther reads at a second grade level. If this church was a Chicago Public School, it would be closed by Arne Duncan.

So it's frustrating. It's as if they translated the Bible into the vernacular and the entire world somehow reads it to say that God wants you to make as much money as possible.